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Inexpensive natural gas spells trouble for future of alternative energy subsidies

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Low prices for natural gas and uncertainty about continuation of federal subsidies is spelling trouble for the future of alternative energy. Recyclers could be affected because of, among other things, the industry’s ties to alternative energy through natural gas-fueled vehicle fleets and projects to burn landfill bio-gas to generate electricity.

The alternative energy industry, which generates power from solar, wind, biofuel, geothermal and other energy sources, has been in a challenging period of late. Perhaps the clearest evidence is the recent history of prices investors pay to own shares of companies in the business. The Ardour Global Alternative Energy Index, which tracks the performance of investments in public companies in the alternative energy industry, is valued today about where it was three years ago, while values in the overall stock market have more than doubled during that period.

One of the biggest reasons for alternative energy’s stagnation is a historic drop in natural gas prices. The discovery of huge fields of natural gas in the U.S., along with the development of new techniques to extract the gas, has caused the price of natural gas to hit all-time lows, especially in comparison to other fuels.


Alternative energy subsidies, meanwhile, have also been declining. Thanks to the expiration of limited-time federal grants, tax credits and loan guarantees, subsidies will amount to just $16.1 billion this year, roughly half of last year’s $30.7 billion and only about a third of their 2009 peak of $44.3 billion, according to analysis by the Brookings Institution and World Resources Institute, in Washington, D.C., and the Breakthrough Institute in Oakland, California. By 2014, federal support is expected to decline to $11 billion, according to this analysis.

Historically, the impact of expiring tax credits has been coupled with sharp drops in the installation of wind powered generation facilities, according to the American Wind Energy Association, a Washington, D.C., trade group. From 1999 to 2000, the number of megawatts of wind power generation installed dropped 93 percent as then-effective federal subsidies expired. From 2003 to 2004, the end of a subsidy program produced a 77 percent falloff.

Several forces are combining to depress federal subsidies, including declining dependence on foreign oil, general budget pressures and election-year politics. The political fallout is particularly pointed because of the scandal surrounding Solyndra, a solar power company that received a half-billion dollars in federal loans before suddenly seeking bankruptcy and ceasing operations in 2011.

Alternative energy has trouble remaining financially viable without such guarantees because of the large cost differential between it and other sources of power. Compared to coal, solar is about three times as expensive on a cost per unit of energy basis. It’s about twice as expensive as natural gas. Wind is approximately a third more costly than coal, and also significantly more expensive than natural gas.

Effects on Recyclers

Many members of the recycling industry rely on natural gas-fueled trucks to collect recyclables and move materials inside processing facilities. However, the Natural Gas Act, which would provide up to $5 billion in tax incentives to convert over-the-road trucks to natural gas-fueled engines, is stalling in Congress. Again, part of the reason is reduced dependence on Middle Eastern oil, in particular. Today, thanks largely to imports of oil from Canada and Mexico, less than 10 percent of U.S. oil comes from the Middle East. However, natural gas-fueled internal combustion engines aren’t the only alternative energy technology feeling the effects of lackluster federal financial support.

Other biofuels, including methane gas produced from landfills and animal waste, wood chips made from construction and demolition debris and other recycling-related power sources, are also feeling the neglect of government financial stimulators. Like wind and solar, biofuels need government support to compete effectively. Congress has mandated production of 36 billion gallons of biofuel by 2022 but in summer 2011 voted to end federal subsidies of ethanol, a biofuel derived primarily from corn.

Summary

Based on a quick look at the forces in play, the short-term future of alternative energy seems bleak. However, there are also significant forces pushing for more use of alternative energy, and they are beginning to make some progress. “The first signs of a transition to increased reliance on natural gas in the transportation sector are beginning to emerge, but this transition will not proceed optimally or quickly unless we make proactive policy choices,” the Brookings Institute’s Michael Greenstone told the Congress Joint Economic Committee recently.

Greenstone noted that fossil fuels continue to receive significant government financial subsidies, and called on the continuation of subsidies to alternative energies as well. As for the natural gas glut that is currently pushing down prices, some of the largest energy exploration companies have temporarily suspended drilling for more gas. And the unusually warm U.S. winter of 2011-2012, which is also cited as a factor in keeping natural gas prices low, also presumably won’t be repeated, at least forever.

Greenstone called for specific measures including subsidizing natural gas-fueled vehicles similarly to the way all-electric vehicles are subsidized now. He also recommended policymakers include so-called social costs, such as environmental damage, when deciding which forms of energy are most cost-effective. Using this measure, wind and solar are much more competitive compared to coal and natural gas, for instance.

Greenstone expects that, unless circumstances change drastically, natural gas will play a much larger role in the country’s energy future, while alternative energy resources also increase their share, although less significantly. For now, however, recyclers who count on alternative energy to power their vehicles or provide profitable uses for recycled materials from wood chips to livestock manure are facing an uncertain future.